EDS Emerges From the Rubble

Just three years ago, many observers doubted that IT consulting firm Electronic Data Systems (NYSE: EDS  ) , would survive. The company was cracking under the strain of managing large IT projects. But EDS now seems to be making a solid comeback, and more importantly, it's implementing strategies to help prevent the big mistakes of its past.

In its third-quarter earnings report, revenues increased 9% to $5.3 billion, and net income surged 85% to $128 million. Free cash flow fell from $495 million to $171 million, but this was primarily due to one-time payments in the third quarter of last year (a normal occurrence for companies with major contract business).

EDS is a global platform that helps companies build massive software systems to improve call centers, allow for better processing of insurance claims, and manage back-office operations. Such megascale IT contracts are naturally complex -- and they can be very risky, if carried out sloppily. That is why EDS has set up teams of highly qualified consultants who establish the initial strategies for key projects, a phase when the greatest problems usually arise.

EDS has also invested heavily in building global data facilities. Its stronger infrastructure means less downtime for customers, an approach EDS calls the "zero outage mentality." It means better performance, greater customer loyalty, and reduced financial penalties.

Just as importantly, EDS has acquired the Mphasis Group, a software services company based in India. The deal increased EDS's headcount in that country from 3,000 to 14,000. Finding such low-cost approaches is critical to success, as competitors like Accenture (NYSE: ACN  ) and IBM (NYSE: IBM  ) have shown.

With the turnaround at EDS in its final stages, the company can now focus on improving revenues. New contracts in the third quarter came to $3.5 billion, down from $5.3 billion in the year-ago period. In full-year guidance, revenues are expected to range from $21.1 billion to $21.3 billion, with earnings of $0.83 to $0.88 per share.

How can EDS juice growth? With $2.7 billion in liquid assets and a stable market cap, acquisitions might be a fruitful path, but that approach will take some time to get results. While the company has made solid progress, it's probably not enough to get investors excited for now.

We're serving up further Foolishness:

Accenture is aMotley Fool Inside Valuepick.

Fool contributor Tom Taulli does not own shares mentioned in this article.He is currently ranked 12 out of 11,654 in CAPS. The Fool has a disclosure policy.


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